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FMA wants better offer documents as securities law overhaul looms large

Wednesday 30th October 2013 1 Comment

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The Financial Markets Authority wants companies to up their game when putting out offer documents to make sure they're accessible to retail investors, ahead of new disclosure requirements in the looming overhaul of securities law.

The market watchdog was disappointed with dense and lengthy documents used in initial public offerings, which it doubted would be read by retail investors, it said in its annual update on implementing new disclosure guidance.

What made it more difficult for retail investors was that issuers didn't release a separate and simpler investment statement, resulting in a "large, complex and daunting" document that may deter retail investors from participating in an offer.

If firms continue to publish offer documents under the new Financial Markets Conduct Act, which is being progressively phased in, issuers will fall short of the clear, concise and effective test.

"The disclosure documents for initial public offerings were so long and dense that we doubt many retail investors would have read them," FMA head of primary regulatory operations Simone Robbers said in a statement. "FMA is concerned that such long documents may in fact have deterred members of the public from investing in the offers."

There have been a number of high-profile listings on the NZX July last year with weighty offer documents, including a 170-page prospectus for the Fonterra Shareholders' Fund, Z Energy's 236-page document, Synlait Milk's 203-page prospectus and the 256-page document for the MightyRiverPower offer.

The FMA was unhappy with the way specific risks to investor offers were described, saying they were "rarely ranked in order of significance to the business" and that it wouldn't be easy for a retail investor to "readily understand and assess risk."

The market watchdog put out disclosure guidelines last year to give issuer and their directors and advisers an understanding of where the FMA was coming from when it reviewed offer documents. The guidance note was initially aimed at new disclosure documents from July 2012, and continuous disclosure was added from this year.

The measure was a stepping stone to the new legislation which will put more pressure on issuers to deliver simple, easy-to-digest documents to allow for better-informed investors. The act comes into effect next year, with a staged transitional period until the end of 2016.

The lack of understanding and limited disclosure around the links between risk and reward is seen a major contributor to the billions of dollars of investor wealth destroyed in the collapse of the finance company sector through the latter half of last decade.

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Comments from our readers

On 31 October 2013 at 4:51 pm Paul Mersi said:
How about this for an idea: why doesn't the FMA take a disclosure document (say from from last year) and publically 'simplify' it - ie provide issuers and their advisors with an example of what is acceptable and show how it can be done. Calling for simplification without the regulator leading the way in terms of an actual example of what is acceptable will continue to fall on the still-deaf ears of issuers (whose hearing has become severely impaired by the clatter of kitchen-sinks from decades doing their best to reduce their risk by throwing everything they can into documents, often more than once).
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